Bank Failure Resolution: Checking the Emergency Kit

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New Zealand is building a strong framework to respond efficiently, flexibly and swiftly in the rare event a bank should fail, the Reserve Bank's Head of Prudential Supervision Toby Fiennes said today.

In a speech to the Institute of Directors in Wellington, Mr Fiennes said the Reserve Bank had considerable safeguards in place to prevent bank crises, including supervising banks and having conservative capital and liquidity requirements.

"I want to emphasise that New Zealand banks are sound and stable and we see the risk of failure currently as very low. However, there is a need to think about how to handle potential stresses, rather like regularly checking your earthquake survival kit at home to make sure it contains everything you might need," he said.

Mr Fiennes said every financial crisis would be different and so it was vital the failure resolution emergency kit was flexible, well-equipped and effective. The Open Bank Resolution (OBR) policy is a good example of this.

"Open Bank Resolution is a tool that gives government an additional option to taxpayer bailout or liquidation. It's not the only option that will be available on the day, but its existence provides important incentives for bank shareholders and management to minimise the risk of failure. …